Stocks in Europe have alternated between losses and gains over the past three sessions ahead of the Federal Reserve announcement.

It is widely anticipated that the central bank will announce only a modest reduction in its monthly bond-buying program.

With some arguing that a modest reduction, or tapering, of asset purchases is largely priced in, financial markets could react should the Fed deviate from consensus expectations. In addition, focus will be on the central bank's economic projections for 2016, any changes to its forward guidance thresholds, as well as the tone of Fed Chairman Ben Bernanke's remarks at a news conference that follows the announcement.

"The market seems priced for Fed tapering today, probably of around $10 billion in Treasurys," said Steve Barrow, currency and fixed income strategist at Standard Bank. "In an era of central-bank transparency and guidance, the biggest market reactions occur when the guidance is shifted; not when the policy change occurs."

Sterling rose to its highest level since mid-January against the dollar after the Bank of England gave an upbeat view of the U.K. economy in the minutes from its last policy meeting, raising its third-quarter growth forecast to 0.7%, from 0.5%.

In addition, the minutes showed the central bank's policy committee voted unanimously to keep the benchmark interest rate at 0.5% and the size of its bond-buying program at £375 billion ($596 billion).

The dollar weakened across the board after U.S. housing starts fell short of expectations in August. New-home construction rose 0.9% from July to an annual rate of 891,000, shy of the 915,000 forecast by economists.

Late in European trading, the euro was at $1.3352 compared with $1.3359 late Tuesday in New York. Sterling was at $1.5964 from $1.5903, while the dollar was at ¥99.02 from ¥99.13.

Shares in InditexIDEXY2.14% rose 0.8% after the Spanish retailer said net profit rose to €951 million from €944 million in the six months ended July 31, slightly higher than market expectations.

Nokia shares rallied 4.1% after Credit Suisse upgraded its recommendation on the stock to "outperform" from "neutral."

In London, shares in Smiths GroupSMGZY-0.39% added 2.6% after the engineering company announced a rise in full-year pretax profit and a special dividend payment.

Among commodities, light, sweet, crude for October delivery was up $1.49 to $106.91 on the New York Mercantile Exchange by the close of European equity markets. Most actively traded gold for December delivery on the Comex division of the New York Mercantile Exchange was down $11.70 per ounce at $1,297.70.

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